“For the Malaysian economy, domestic demand has continued
to support growth amid the continued moderation in external
demand,” the central bank said. “The sustained weakness in the
external sector may, however, affect the overall growth
momentum.”

The central bank is balancing a faltering global recovery
that cooled Malaysia’s growth to less than 5 percent for the
first time in seven quarters against resilient domestic spending.
Household indebtedness levels have been increasing at a
“strong” pace and averaged 12 percent per annum in the past
five years, Bank Negara said last week as it imposed limits for
mortgages and personal loans.

“Any strain in the external environment including the
slowdown in the growth of China could potentially be the drag in
terms of external trade going forward,” Patricia Oh Swee Ling,
an economist at AMMB Holdings Bhd., said after the decision.
“That said, domestic demand has been quite resilient, that had
provided growth the support during the first five months of this
year.”

Indonesian Contrast

Malaysia’s decision contrasts with that of Indonesia, which
raised borrowing costs for the second straight meeting today to
cool inflation pressures after the government raised fuel prices.

While Indonesia’s economy grew 6.02 percent in the first
quarter from a year earlier, Malaysia’s gross domestic product
rose 4.1 percent in the three months through March from a year
earlier, after a revised 6.5 percent gain in the previous
quarter. Malaysia’s inflation of 1.8 percent in May compares
with Indonesia’s 5.9 percent in June.

“While inflation is expected to rise in the second half of
the year due to domestic supply and cost factors, it is
projected to remain modest,” Bank Negara said. “Pressures from
global commodity prices are also likely to be contained given
the moderate global growth prospects.”

The central bank imposed a maximum tenure for mortgages and
personal loans last week, joining neighbor Singapore in
implementing measures to limit risks stemming from rising
household debt. Banks and other credit providers can now provide
mortgage financing of not more than 35 years from a previous
tenure of as long as 45 years, it said.

While the global economy continues to experience slow
growth and financial market volatility has increased
“substantially” as markets reassessed the direction of policy,
Malaysia’s private consumption is expected to remain steady,
helped by income growth and stable labor market conditions, the
bank said.

Malaysia’s industrial production rose 3.4 percent in May
from a year earlier, a report showed earlier today.